It is very important to have a retirement plan to provide for you in your old age. However, most people start to worry about their old age when it is too late to do anything about it. None of us wants to be poor when we are old and weak and when we are in possible need of expensive medical care.
NMG’s Retirement Funds expert, Ian Richards, addresses eight pertinent questions frequently asked by their clients.
- What happens to my retirement fund savings if I leave my employment before retirement age?
When you leave employment you will have the choice to either re-invest your retirement savings or take the whole or a portion in cash. If you take cash from your retirement fund it will be subject to tax. If you re-invest into another approved retirement vehicle, there should be no immediate tax liability provided you transfer to a similar type of fund, e.g. pension or provident fund. (the benefit will be fully taxable if you transfer pension fund monies to a provident fund).
- As an NMG consultant, what do you advise I do and why?
I would definitely advise that you re-invest your retirement fund savings if you change jobs – this is critical if you would like to retire financially secure. The important point to remember is that re-investing your monies does not necessarily mean that the savings are locked away until you retire – there are retirement products that will allow you to access your money at a later date, should this be required. This is why it is important that you speak to a qualified financial advisor who will assist you through the process.
- What happens to my retirement fund or pension fund when I’m retrenched?
As with resignation, you will have the choice to either re-invest your retirement savings (with no tax due) or take the whole or a portion in cash (and pay the tax). It is important to note that the South African Revenue Service provides a more favourable formula for the calculation of tax on retrenchment payouts from retirement funds than for ordinary resignation or withdrawal.
- What are the main differences between provident funds and pension funds?
The main differences between pension and provident funds are the following:
- Under a pension fund at least two-thirds of the retirement benefit must be paid as a pension for the balance of the pensioner’s life. A maximum of one-third of the retirement benefit may be taken as cash. If the total retirement benefit is under R247,500, the full amount may be taken in cash;
- Under a provident fund, the full amount of the benefit available at retirement may be taken as a lump sum cash payment;
- The tax concessions on contributions made by employers and members in respect of the two types of funds, differed prior to 1 March 2016. However, National Treasury amended this in 2016 with a view to the eventual full alignment of retirement benefit options in pension and provident funds. Now all members of either type of fund can claim a tax deduction of the lesser of 27.5% of their salary or R350,000;
The rest of the alignment envisaged was that provident funds would gradually become more like pension funds, ie to gradually restrict the amount that can be taken in cash so that in the long run they are the same (1/3rd cash: 2/3rd pension). This proposal, despite being in the best interests of members, was not popular and has been postponed to March 2019.
- Explain the current tax deduction on contributions in a bit more detail?
Any contribution that your employer makes on your behalf is added to your salary for tax, ie as a fringe benefit. However, you can then deduct your contribution plus the employer contribution (up to a combined total of 27.5% of salary) and reduce your tax. High earners have this deduction capped at R350,000 per annum. This deduction is quite powerful because it means instead of paying tax on 100% of your package (including the employer contributions) you only pay tax on 72.5% of your salary – quite a saving.
Another way to look at it is that if you are in the 18% tax bracket for example. For every R100 that you put into your retirement savings, you actually put in R82 and the Government puts in R18, and so on. At the top tax bracket, R45 of every R100 you save is made by the Government.
A last important point to note is that because the Government is looking to align all the different types of funds, that this 27.5% deduction will also include any contribution that you make towards a retirement annuity fund. This is a big advantage compared to the previous arrangement where the tax deductions to retirement annuity funds were less favourable. The Government is making it easier for us to save for retirement to encourage us to do more of it.
- Why do I need to complete a Beneficiary Nomination Form for my retirement fund?
In terms of the Pension Funds Act, 1956 (the Act), the responsibility to distribute lump sum death benefits payable from a registered pension (or provident) fund lies with the Trustees of the fund. The completed nomination form will act as a guide to the Trustees and will assist them with the decisions they need to make to ensure that all dependants and nominees are considered when the benefit is finally distributed.
- Can I borrow against my retirement fund savings?
The Pension Funds Act makes provision to allow members to borrow monies for housing purposes, using their retirement savings as guarantee/security. The loan would need to be for:
- Buying an existing home
- Building a new home
- Improving an existing home
- Deposit on a house.
The property must be owned by the member or their spouse and must be used as the normal residence of the member and/or their dependants.
However, housing loans would only be made available if both the Fund and the Employer have entered into a surety agreement with a financial institution. Your employer would be able to advise you on this.
- Can I contribute additional amounts into my retirement fund?
You would need to discuss this matter with your employer for the following reasons:
- Your retirement fund would need to allow for this in the Rules of the Fund;
- Your employer would need to be able to accommodate this if you would like the contribution to be made through payroll;
- The Fund administrator would need to confirm whether they accept monthly, annual and/or ad hoc additional contributions.
Additional contributions to your retirement are a very good tax vehicle and a cost effective way to enhance your retirement benefit. However if that is not permitted, as outlined above, you could alternatively make additional contributions to a retirement annuity with the same tax advantages.
It is recommended that you discuss this with your financial advisor to ensure that any additional contributions that you make are tax deductible within the current SARS limitations.